Amid the recent public debate over the National Petroleum Authority’s (NPA) Price Floor, former Power Minister and former Chairman of Parliament’s Mines and Energy Committee, Dr. Kwabena Donkor, is throwing his full support behind the policy.
The former legislator argues that a deregulated market does not mean there is no regulation, especially in a critical sector such as the downstream petroleum sector.
For him, the fact that the market is deregulated means there is a need for systems and mechanisms to safeguard the industry and the consumer.
“Any student of regulatory policy will tell you that it is when you deregulate that you need a strong regulator to set up the principles of competition,” the former Minister for Power told The High Street Journal in an exclusive interview.
The Arguments for the Price Floor
Ghana began operating a deregulated downstream petroleum market in July 2015. With the introduction of the policy, Oil Marketing Companies (OMCs) are free to set their own prices within regulatory guidelines.
However, according to Dr. Donkor, without a price floor, the market could quickly become distorted. He fears that there could be the danger of predatory pricing among the OMCs.
This, he explains, is a situation where stronger OMCs with deeper financial resources can temporarily sell fuel at unsustainably low prices, even below cost, to attract customers and squeeze out smaller competitors.
Once weaker players exit the market, the dominant firms can then raise prices sharply to recover losses and generate super profits.
“There is a need for a floor price because without a floor price, it is easier to introduce what we call predatory practises. Where the stronger OMCs with the financial wherewithal in the short term can sell at prices that do not make economic sense,” he narrated.
He added, “They can indirectly subsidise the consumers for a while in order to wipe out other competitors. And once they have a dominant market share, they can then raise prices to recover those losses and make super profits.”
On the surface, consumers may initially celebrate lower prices. But in the long run, reduced competition can mean higher prices and fewer choices.
Protecting the Industry to Protect the Nation
Dr. Kwabena Donkor maintains that the survival of the industry is key to the country’s socio-economic development. It is therefore prudent that the regulator does not sit aloof, lest price wars collapse the industry.
Fuel distribution underpins transportation, agriculture, manufacturing, and virtually every sector of the economy. Practically, if smaller OMCs collapse under aggressive price competition, supply chains could weaken, investment could decline, and market stability could erode.
In his view, the regulator’s responsibility goes beyond protecting consumers at the pump. It must also ensure the industry remains profitable and sustainable enough to function effectively.
“That is why, to protect consumers and also protect the industry itself, we must always remember that we must have a viable industry, a downstream industry. If we don’t have a viable downstream industry, the whole nation suffers. So the viability of the industry is also the role of the regulator. So the regulator has to balance the viability of the industry, the profitability of the industry, with the protection of consumer rights,” he maintained.
The Floor Price Is Not Arbitrary
Critics sometimes portray the price floor as a fixed or artificial mechanism. But Dr. Donkor insists it is dynamic and grounded in economic realities.
The NPA, he says, considers several factors when setting the floor. These include global crude oil prices, the cedi-dollar exchange rate, government taxes and levies, and reasonable margins for OMCs and dealers
These components are reviewed regularly, meaning the floor price adjusts in response to market conditions.
This means that at the bare minimum, even if an OMC decides to sell at the floor price, it will still be sustainable and recover all costs.
The Bottomline
For the former Chairman of the Parliamentary Select Committee on Mines and Energy, the floor price guarantees that, at a minimum, OMCs, regardless of size, can operate viably.
This levels the playing field. Smaller companies are protected from being pushed out by aggressive underpricing. Consumers benefit from sustained competition rather than temporary discounts followed by monopolistic pricing.
“I am all in support of the floor price, because the floor price guarantees the viability of the industry,” he emphasized.
As he put it, “You must have head before you chew corn.” In other words, the industry must survive if it is to serve the nation effectively.
